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July 2022

These are not times of extreme distress, despite what you might be reading. An interest rate pop of 200 basis points does not mean we’re having an economic meltdown, a real estate crisis, or anything like that. Maybe that’s right around the corner but it’s not here today.

Instead, today is when to push sellers for price reductions and to hunt harder for lower rate loans. Put your offers in, let someone else over-pay or wait for the seller to come down to your price. It seems like valuations should be coming down in reaction to the hit that higher interest rates have on investor returns. But we all know that takes time. Owners hang onto their properties because the demand for rental units is still strong.

There will be more sellers who have to sell, though. It could be that their adjustable mortgage just adjusted and it’s killing them, or they foresee a much bigger crisis looming. Those owners are out there so keep looking.

Today is also a time to consider loan types you might not have considered before, such as recourse loans. If you are buying right, regardless of whether you’re syndicating or not, a recourse loan from a bank or anyone other than Freddie or Fannie should not be a big risk. Keep the term long and the prepay penalty low. The Fed knows how to curtail inflation and that will be solved soon, then rates will fall again. When, who knows, but when you have a healthy duration to your loan term, you’ll have an opportunity to refi and start making some real money!

Renter demand shows no signs of abating. Cap rates might increase a little but overall conditions remain solid. How often have you said “I wish I bought back then”? Then is now, it’s still a good time to buy.

Podcast Alert

Thoroughly enjoyed my recent podcast discussion with Aileen Prak at Bonavest Capital, check it out!
Click here to listen.

Asheville, NC – Very few cities have rebounded their job growth rates as much as Asheville. It’s a destination city because of its western North Carolina setting and unique laid back culture so it was hit hard when covid put a halt to travelling, but in the last 14 months it’s monthly job growth year-over-year has averaged over 7%. Still going strong at 4.6% since the beginning of this year.

What’s causing this growth? It doesn’t hurt that it has become the new home for seniors moving south and work-from-homers moving away from the big cities. With an MSA population of over 469,000, there are over 24 organizations which employ more than 500 people. That is good diversity.

Add to that a lot of very high “most livable” ratings from places like livability.com and forbes.com because of the Blue Ridge Mountains, the arts community and more breweries per capita than any other city in the U.S.

Rent growth, stellar at 17% over the last year according to Yardi Matrix, but as I’ve previously mentioned these are not sustainable. Don’t underwrite with anything close to it. It reflects a high level of demand and that is highly likely to continue for the foreseeable future but not indefinitely.

Getting the most from your marketing dollars

When do you think about your marketing spend? When your units are not renting? When you are a few months into ownership? Or on day one? Clearly you were thinking about your marketing budget when you first underwrote your property, and how much you plan to spend depends on a number of factors including its condition, the market, its current occupancy, and people on your property manager’s team who are available to respond to inquiries. And you have chosen your property manager because they have marketing experience, they know how to find tenants to fill your empty units and tenants to replace the ones who move out.

But now you’re a few months into ownership, a tenant moves out, and you want to push rents. Maybe you’ve even renovated the unit. Up goes the rent but no one is responding to your marketing. What do you do.

You have a few options. Are there renters out there for your property? Of course there are, because you bought into a market where healthy renter demand exists. Does no one want to pay your premium and should you lower the rent? Did prospective renters tour the unit and then decide to pass on it? Or did they even get that far?

I am an advocate of trying almost anything before lowering my target rent. Truly testing the rent means having the right marketing in place to support the rent you expect on this renovated unit. You expect that your PM has already figured out what works best in their market but that’s not always the case. This is where you, the owner, need to be actively involved.

If you had showings but few or no applicants, the issue could be the finishings in the unit. Is it modernized, or just a few features upgraded, or just some general cleaning?

If that’s not the issue, then it’s possible you’re not reaching the right audience. Where do renters in your area search for rentals? It is not the same everywhere, and you’re not going to get much help talking to people because everyone has their own opinion. You need to test different marketing options.

Spend some money on marketing. Overspend a little. You have to find out what works. Are you using a free service like Facebook Marketplace? That’s a site that requires faster responses, not just email replies. Be sure your team is on top of those. Do you pay for an advertising tool like Zumper that pushes your ad out to other websites? My experience is most of the leads come from a small number of sites. You just don’t know which ones.

Try different premium advertising sites, even more than one at a time. It might seem like you’re spending a lot for a small number of units you need to rent, but it will be worth it. When you are reaching the right audience, not only are your turns quicker, but a bigger demand means you can get the higher rents you expected.

If the difference between the premium rent and the rent-it-quickly rent is $50, that is $600/year in income loss. At a cap rate of 6% that is a loss of $10,000 in property value (Cap Rate = NOI/Property Value, so Property Value = NOI/Cap Rate). Any reduced income from your unit staying vacant a little longer or increased expense from premium advertising is more than offset by the higher valuation. And your lost rent and higher expenses are only one time, but once you know the right marketing mix, you can use that for every new unit you need to rent.

Don’t consider lowering your rent until you’ve tried all you can to find marketing that works.

Cardinal Oak Investments acquires, improves, and manages under-valued commercial apartments. We buy B and C class properties of around 100 units in the Southeast and Midwest. We look for properties whose amenities, aesthetics, and appeal have fallen into obsolescence, whose care reflects tired management, and whose location is where a stable workforce wants to live.

And we partner with like-minded investors looking for stable assets that produce good cash flow and strong appreciation.

Founded and managed by John Todderud, Cardinal Oak Investments has acquired properties on both coasts and in between creating annual double-digit returns.

For more information, schedule time with me or contact us.

Please note: Past performance is no indication of future performance.

July 2022

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